Much has been made of the revised growth forecasts made by the International Monetary Fund (IMF). IMF’s new projections, revised downward from the one it made less than a month ago, now project world output growth to fall to 3.7% this year and 2.2% in 2009.
It sounds strange, especially if this is the biggest crisis since the Great Depression, as so many experts seem to be saying. That’s because the last time world output grew by 2.2% was in 2001, after the dotcom bust. The recession of the early 1990s was much worse, with global gross domestic product or GDP growth falling to 1.46% in 1991 and 2% in 1992 and 1993. So why is IMF saying that the pain will not be that bad this time?
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The short answer lies in one word—decoupling. The events of this year in the financial markets have made most people shy about mentioning decoupling. In 2001, growth in the advanced economies was 1.2%, with growth in the euro area at 1.9%. In 2009, the IMF forecast is for growth in the advanced economies to contract by 0.3%, with the euro area economy contracting by 0.5%.
It fits in snugly with the findings of a recent IMF study by researchers Stijn Claessens, M. Ayhan Kose and Marco Terrones, which found that “although recessions accompanied with severe credit crunches or house price busts last only a quarter longer, they have typically resulted in output losses two to three times greater than recessions without such financial stresses. During recessions coinciding with financial stress, consumption and investment usually register much sharper declines, leading to the more pronounced drops in overall output and unemployment”.
But that stress, IMF seems to believe, will largely be confined to the developed economies. The emerging and developing economies, which grew at 3.8% in 2001, are forecast to expand at 5.1%. Among these, developing Asia, which had a rate of growth of 5.8% in 2001, is forecast to grow by 7.1%; the Asean-5, which expanded by 2.6% in 2001, is expected to grow by 4.2%; the projections put West Asian growth at 5.3% compared with 2.6% in 2001 and growth in the developing countries of the western hemisphere, including Mexico and Brazil, at 3% compared with 0.7% in 2001.
According to IMF, therefore, while growth rates for both 2002 and 2009 are likely to be the same, the difference is that the developed world will contract while emerging nations will grow faster than they did in 2001.
Within developing Asia, Chinese GDP growth is forecast to be 8.5% in 2009, slightly more than the 8.3% notched up in 2001. The IMF forecast for Indian growth in 2009, however, is 6.3%, far higher than the growth of 3.9% in 2001. Brazil is forecast to grow at 3% in 2009, compared with 1.3% in 2001.
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Graphics by Ahmed Raza Khan / Mint